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In this new episode of our Market Views series, Xavier Chapard, Strategist at LBP AM, shares his insights on current market dynamics and explains why the global economic cycle continues to show resilience despite ongoing shocks.
Since the beginning of the year, markets have been volatile, reacting to announcements from the U.S. government. Yet overall, markets have delivered strong performance for the third consecutive year and are once again trading at optimistic valuation levels.
However, protectionist measures and lingering uncertainty continue to weigh on global growth and push U.S. inflation higher. While uncertainty has eased from its peak, it remains elevated. These shocks are largely offset by supportive factors such as lower energy prices, monetary policy easing, and a surge in tech investment. This resilience is helping the global cycle hold up.
In the coming months, we expect markets to remain on an upward trend. They are supported by modest but more resilient growth than anticipated, further Fed rate cuts, and fiscal policies that are turning significantly more favorable from the fourth quarter onward, particularly in the U.S. and Germany.
That said, the upside potential is constrained by the prevailing optimism, reflected in already elevated valuations, especially in the U.S. Moreover, political uncertainties will not disappear and could still trigger periods of volatility.
Against this backdrop, we favor risk assets over government bonds and European and emerging market assets over U.S. assets, while maintaining strong diversification.
We hold a constructive view on equities heading into year-end, a seasonally favourable period.
We prefer European and Chinese equities, which still offer catch-up potential compared to U.S. equities, even though part of the rerating has already occurred.
We are not negative on U.S. equities, as companies continue to outperform and concerns about an AI bubble seem premature. However, elevated expectations and valuations leave less room for upside.
We remain neutral on corporate bonds, with a bias toward higher quality (IG vs HY).
Credit fundamentals remain solid, with healthy corporate balance sheets, no refinancing wall within the next two years, and still attractive yields.
However, credit spreads are now historically tight, particularly in U.S. High Yield, offering little protection against localized negative surprises. Selectivity is therefore key.
We maintain a tactical and agile approach to sovereign rates, as we do not expect strong directional moves in the coming quarters.
Following the decline in yields since summer, we are slightly underweight long-term U.S. and European rates, especially as debt issuance remains significant to finance public deficits. We prefer to capture carry on shorter maturities.
In Europe, we remain cautious on French debt despite its attractive yield and continue to favor Southern European bonds, which benefit from a supportive economic backdrop and healthier public finance trajectories.
The opinions expressed (i) are considered reliable by LBP AM and are based on or justified by the economic, financial, stock market, and regulatory context, and (ii) are provided for informational purposes only.